On 26 March 2015, the FCA published DP15/3 (the “Discussion Paper”), seeking “early” views on its policy choices when implementing some aspects of MiFID II.
The Discussion Paper provides the first indications of the approach the FCA is minded to take when making MiFID II required changes to conduct of business and organisational requirements.
FCA policy choices – increasing the regulatory burden?
It is immediately apparent that the FCA is thinking of applying the relatively few national discretions available to it to increase, rather than reduce, the regulatory burden on firms. Its stated justification for this is often that applying the highest standards consistently across firms ought to avoid over-complication and confusion. Whether this will prove to be the case in practice remains to be seen.
For example, in addition to the FCA unsurprisingly planning to retain its RDR regime in full, options floated include:
- Structured deposits MiFID II requires the application of certain investor protection requirements to structured deposits. One option canvassed by the FCA is that structured deposits might be fully integrated into the Conduct of Business sourcebook, which would have the result that a greater number of obligations would be applied to structured deposits than required by MiFID II;
- Fee rebates and discretionary managers The FCA proposes putting in place similar rules to the RDR in relation to discretionary investment management activities, including a total ban on receipt of third party payments by discretionary managers even if rebated to clients (although MiFID II only requires the client to be credited with the relevant amount). The FCA is also interested to hear views as to whether, as an alternative to banning all rebates, only cash rebates should be banned;
- Local authority classification Under MiFID II local authorities will be treated as retail clients unless they opt-up to categorisation as elective professional clients. The FCA is considering whether the existing opt-up regime is appropriate in determining whether local authorities have the requisite expertise and knowledge to merit being treated as professional clients. Its stated preference is to strengthen the opt-up criteria, potentially such that only those local authorities which can currently meet the criteria to be categorised as per se professionals would be able to opt-up;
- Telephone taping The FCA is considering applying the full MiFID II requirements in relation to the recording of telephone conversations and electronic communications to certain firms which benefit from the optional exemption in Article 3, which could result in substantial extra costs for smaller firms in particular, and also applying the full requirements to discretionary investment managers rather than maintaining the existing “duplication exemption” which means that such firms currently are not required to record conversations and electronic communications with other firms that are subject to the recording rules; and
- Remuneration The FCA is considering applying MiFID II style remuneration standards for all sales staff and advisers in regulated firms, regardless of the type of business they undertake.
The Discussion Paper also debates the applicable standards for "independent advice" under MiFID II and highlights some of the key changes to be implemented by MiFID II, such as extensive costs and charges disclosure obligations, the tougher approach to types of third party benefits and payments firms will be permitted to receive and the reduction in the types of products that can be classified as “non-complex” (and accordingly need not be subject to an appropriateness test when the product is being distributed without advice). It is therefore essential reading for firms carrying on MiFID business and considering the impact of MiFID II on their business.
The Discussion Paper is also relevant for some firms and activities which are and will remain outside the scope of MiFID. In particular, it notes a number of areas where the FCA is thinking of applying MiFID II provisions to non-MiFID products and firms. Generally, the FCA proposes to apply MiFID II provisions to insurance-based investment products and pensions and also to extend the retail categorisation of local authorities to non-MiFID business, which could affect their ability to invest in funds.
Countdown to implementation
MiFID II is due to take effect on 3 January 2017. To some that may sound like a date in the distant future but this Discussion Paper serves as a reminder that it is moving ever closer. Businesses affected by MiFID II, or by the FCA’s proposed extension of MiFID requirements, need to be prepared to engage in dialogue at this stage if they want to influence the final shape of our domestic implementation rules. This is underlined by the fact that HM Treasury also published its consultation on the transposition of MiFID II into UK law on 27 March 2015.
Even those businesses which have already got to grips with at least the headline changes to be effected under MiFID II will need to consider carefully the potential practical consequences of the sometimes higher standards being considered by the FCA in this Discussion Paper.
The FCA is seeking comments on the Discussion Paper by 26 May 2015 and the UK Treasury wants comments on its proposed approach to transposition by 18 June 2015. The FCA’s detailed Consultation Paper on proposed changes to its Handbook is likely to be produced much later in the year, after the European Commission produces the Level 2 implementing measures on which ESMA consulted at the end of last year. It is quite possible that some of those measures will be implemented as a directly applicable regulation not requiring, or permitting, further FCA action. However, the FCA plans to confirm its final rules by July 2016, in line with the transposition deadline, so the Discussion Paper represents the best chance firms are likely to have to influence FCA thinking on the topics covered.